Can expansionary gaps produce investment in the long term? true or false

Expert Solution

ANSWER : TRUE

Expansionary gap occured while the actual output of the economy is greater than its potential output, that gap is called expanisionary gap.Potential output is the maximum output that could have been produced by an economy if all the resources in the economy were fully employed that is known as'full employment.'

In the long run, if an economy that is experiencing an expansionary gap /inflationary gap which adjusts automatically through the price mechanism. while the exp[anisionary gap ,it is producing potential output.This means the fullemployment occured.that means available workers need to work longer hours besides hiring workers to fill jobs.While the labourcost will rise.However fullemployment increase production and supply it will rise price that leads to aggregate demand falls, the economyattain the equilibrium at its potential output level. Moreover,In the long run, due to the increasing aggregate supply creating a new, higher level of potential production. Then the firms will innovate seek to meet the higher demand without raising costs.so that we can say the expansionary gaps produce investment in the long term.There is do not occured any new investment or additional cost.

Rahul Sunny answered 2 years ago

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